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Who will be the first to launch a serious competitor to Netflix’s Watch Instantly service? That question may be close to having an answer, as Amazon’s been tipped to spin off its “Amazon Prime” streaming video section as a standalone subscription offering.

The suggestion, interestingly enough, came from Netflix itself in a letter to shareholders released yesterday, reports Reuters. “One class of competitors is the other over-the-top pure plays such as Hulu Plus and Amazon Prime,” the letter reads, adding, “We expect Amazon to continue to offer their video service as a free extra with Prime domestically, but also to brand their video subscription offering as a standalone service at a price less than ours.”

Spokespeople for both Netflix and Amazon have declined to comment on the suggestion, but an anonymous source apparently told the New York Post that Amazon was already working on the matter but may be facing trouble when it comes to licensing content.

“The big issue is their bundled media service,” the “unnamed digital media executive” told the Post. “The subscription service, with the goodies being free video, is contractually an issue for the licensers.” Amazon customers can purchase a $79-per-year “Prime” membership, which gets them free two-day shipping on items Amazon sells. The company tossed in access to a selection of free streaming video content and e-books last year to help sweeten the deal.

It’s worth noting that in the U.K., Amazon already has dominance in the streaming content space thanks to its Lovefilm subsidiary, which was successfully offering DVD rentals by mail as well as streaming content online to subscribers long before Netflix’s recent launch into that market. Amazon became the largest shareholder in Lovefilm in early 2008, before taking full control of the company last year.